RBI to set up expert panel to examine economic capital framework

At the board meeting, RBI governor Urjit Patel and his deputies are expected to support its mission to clean up the bank's balance sheets.

After a marathon nine-hour meeting, the Reserve Bank of India's central board on Monday took the middle ground in a bid to defuse rising tension between the government and the central bank.

The economic capital framework is likely to review these aspects.

In his first public comments since the spat between the RBI and the Finance Ministry came out in the open, Swadeshi ideologue S Gurumurthy had last week said the stand-off "is not a happy thing at all".

According to him, return on assets will break even by June 2019.

Getting the RBI to agree to its demands will help Prime Minister Narendra Modi's government meet budget goals by using a part of the central bank's reserves, and kick-start lending by weak banks to keep the economy firing ahead of an election next year. Despite Union Finance Minister Arun Jaitley's confidence on achieving the 3.3 percent deficit target, top bureaucrats in Delhi privately speak of a developing fiscal crisis that could worsen post-December if global crude prices don't ease significantly.

On the issue of the Economic Capital Framework (ECF), the board chose to constitute an expert committee to examine the ECF structure, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI.

The board also advised that the RBI should consider a scheme for restructuring stressed standard assets of micro, small and medium enterprise (MSME) borrowers with aggregate credit facilities of up to ₹25 crores. The membership and terms of reference of the new committee will be jointly determined by the government and the RBI.

"Governments that do not respect central bank's independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution", Acharya said at an event in Mumbai.

Similarly, the MSME credit recast concession is not a big one considering the demand from the Centre was for easier NPA norms for the sector and more credit flow. The differences revolved around the two topics of how much reserves the RBI should carry and whether the finance ministry had precipitated matters by invoking Section 7 of the RBI Act, that allows it to give directions to the RBI in public interest.

"The Reserve Bank of India Governor should work in sync with the government or otherwise resign", SJM's co-convener Ashwani Mahajan had said.

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